cooling britannia - rathbones · 2019-04-03 · cooling britannia a country needs to spend on...

In brief

Making the gradeWhy quality matters when investing in corporate bonds Stay investedIt’s important to be patient as the business cycle matures

Retail therapyProperty owners are adapting to the popularity of online shopping

A sustainable approachInvesting can have a positive impact on society and the environment

As the UK works through a significant moment in history, policies that boost trade and investment could relieve the country’s economic malaise

Cooling Britannia

Issue 20 — Second quarter 2019

2 rathbones.com InvestmentInsights | Issue 20 | Second quarter 2019

Given our quarterly publication schedule, it was always going to be difficult to cover Brexit with a looming departure date that is now something of a moving target. Breaking up is never easy but we hadn’t been expecting so much uncertainty to remain this close to the deadline.

Regardless of the eventual outcome, the UK faces a series of economic challenges over the long term. Rather than add to the uncertainty, we thought it might be more helpful to assess how the UK economy has fared since the referendum and the longer-term outlook with or without Brexit, which we explore in our lead article on page 3.

On page 5, we explain why we think quality matters more than usual when investing in the corporate bonds markets today. Our analysis suggests it might be time to reduce exposure to the lowest-quality investment grade corporate bonds in favour of the relative safety of the most highly rated debt.

While we remain in favour of staying invested in equities as the economic cycle matures, we believe it’s also prudent to avoid some of the racier sectors and companies in favour of businesses that tend to be less dependent on economic conditions for their performance. You can find out more on page 6.

More of us are moving online to do our shopping, which has far-reaching implications for the property sector, which we explore on page 8. Distribution centres and warehouses have benefited from this trend, while the high street is having to adapt as more spending shifts toward experiences over material goods.

In our final article on page 9, we mark our tenth anniversary as a signatory to the UN’s Principles for Responsible Investment, and take a look at how since the global financial crisis asset managers have had to up their game on this front. For Rathbones, already responding to these challenges, the financial crisis created further incentive to refine and develop our own approach.

I hope you enjoy this edition of InvestmentInsights. Please visit rathbones.com to explore our latest views on the issues shaping financial markets this year and beyond.

Julian ChillingworthChief Investment Officer

Foreword

rathbones.com 3InvestmentInsights | Issue 20 | Second quarter 2019

Cooling Britannia

The UK faces an uncertain future at a significant moment in history

We have a small, open economy. Small may sound a little strange, if you know that the UK has the world’s fifth-largest economy by gross domestic product. However, it isn’t large enough to influence global asset prices, interest rates or the pace of global growth in any meaningful way. Last year, the UK economy accounted for 2% of global output and since 2008, the UK has accounted for just 1% of new economic output (figure 1).

Although we’re a small economy, we have some big problems. It took the UK a lot longer than most economies to recover from the 2008 global financial crisis and, since that recovery began, growth in output per capita has been very weak. It has averaged just 1.2% per year — a serious drop compared with the 2.5% per year it averaged in the previous 25 years.

Brexit is only part of the problemThe UK isn’t the only country to suffer slowing output per capita, but the fall in living standards since 2008 has been particularly severe. We are undergoing the longest slump in the standard of living for at least 150 years and have the poorest rate of social mobility of any major advanced economy.

Brexit has made our future uncertain and business investment has plateaued in the UK, while it’s been accelerating across the rest of the world. Although households have been consuming more, many have done so by reducing saving. The uncertainty is taking its toll and could continue to weigh on capital growth for years to come.

What about our outlook over the next

10 to 15 years? Rathbones’ own forecast for the UK puts the pace of economic growth at about 1.5% per year. That may sound decent, but it’s actually weak compared with the past and to the rest of the world. So why is our future one of relatively weak growth?

There are a few reasons, and demographics is one. There are more people ageing out of the workforce than there are growing up into it, but that challenge is common across developed countries. The slowdown in the rate at which we are investing in capital also contributes to our weak growth. We need more factories, more computers and better broadband to make more stuff, but again, that problem is not just ours.

The problem that is unique to us is the marked slowdown in the rate at which foreign companies and governments are taking ownership stakes in domestic assets. That is

worrying because modern economic growth relies on this kind of inward investment for technological transfer, or learning from others and improving on it. Firms that receive investment from overseas are almost twice as productive as firms without any such link, and it’s that potential slowdown in productivity that we are worried about.

Trade plays an important role too, and there is an overwhelming amount of evidence to show that trade openness is linked to productivity. Less trade means less specialisation, and less specialisation means the more manpower and capital

Uncertainty surrounding Brexit is likely to continue for some time. We want to cut through the fog, and consider the broader state of the nation’s economy.

Source: Datastream, Oxford Economics and Rathbones.

Figure 1: UK contribution to global GDP growthThe UK economy accounted for just 2% of global output in 2018 and has accounted for just 1% of new economic output since 2008.

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The UK isn’t the only country to suffer slowing output per capita, but the fall in living standards since 2008 has been particularly severe.


Cooling Britannia

a country needs to spend on producing things in which it lacks a comparative advantage or, in other words, it would be better off importing.

Being part of the European Union (EU) has been a great boost to UK trade, and we trade with Europe far more than the gravitational effects of simply living next door would imply. In reality, we may just be too far away from other trading partners to fully offset withdrawing from the EU, even if we can strike a trade deal with all of them.

British trade has made the most gains in the services sector. The UK is very good at trading in services but trades relatively less in goods than most other major countries. This is a problem that successive governments have tried to rectify, but to no avail. It’s a structural weakness that cannot be solved by trade deals, deregulation or lower corporation taxes.

There is a way outIs there a solution? Yes is our view — investment in research and development (R&D), across both public and private sectors. R&D is vital to kick-starting new technologies and increasing growth, but we have fallen behind other major economies in the amount we spend on R&D relative to the size of the economy. On a positive note, the Conservative government has released a target to get R&D spending to a point that it would be nearly at US levels by 2027. We hope this target continues regardless of which government takes us forward and that a detailed, innovative plan emerges to accompany the target.

Beyond the short-term risk to trade from Brexit, the more interesting longer-term question is whether further EU harmonisation would divert trade away from the UK if the country is not part of the club.

Our research suggests that in such a scenario, the longer-term trend for UK productivity growth would be lower. Potential GDP growth would be reduced by slower productivity growth and inward migration, bringing structurally lower interest rates. There would also be a deterioration in the balance of trade in goods and services; the current surplus in services would be eroded by the loss

of access to the single market, and the movement of labour and capital would be more restricted.

However, we believe a sustained negative deviation from the current trend of UK economic growth over the next 10 to 15 years is unlikely. In our 2016 report, If you leave me now, even in the event of a no-deal Brexit, we put the risk of such a permanent loss of economic growth potential at just 17%. Beyond that, the UK may even experience a positive shift if it can successfully invest in R&D and negotiate new treaties of economic integration with higher-growth nations, particularly if the EU project stalls.

The UK stock market is not the UK economyAn annual growth rate of 1.5% isn’t a great outlook; it’s one of relative economic diminishment. The good news is that the UK’s stock market is very much not the UK economy. Publicly listed UK companies as a whole only get about 30% of their revenues from the UK, with the vast majority of earnings sourced from overseas. This means that our stock market is exposed to faster-growing economies which should boost revenue growth for UK equities (figure 2).

Sterling has already fallen so much that it is now significantly undervalued against other major currencies and pessimism has been priced in. Against the euro, it is still undervalued almost by as much as it has ever been in the past 35 years. (Although the euro hasn’t existed for that long, we can calculate

a theoretical exchange rate based on the fixing rate at which the old national currencies joined the euro.) Whatever happens with Brexit, it seems likely that sterling will appreciate over the long term and further downside should be limited. You even may start to see UK equities coming back in favour with global investors, regardless of the Brexit outcome.

Source: Datastream, Oxford Economics and Rathbones.

Figure 2: Globalisation is important for the UK economyThe geographic revenue breakdown of stock market indices by regions shows how much British companies rely on income from other parts of the world.

Sterling has already fallen so much that it is now significantly undervalued against other major currencies and pessimism has been priced in. Against the euro, it is still undervalued almost by as much as it has ever been in the past 35 years.

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Source: Bank of America Merrill Lynch Sterling Corporate Bond Index and Rathbones.

Figure 3: Changing composition of UK corporate bond marketsThe lowest-rated BBB credits have grown to roughly half of the overall investment grade market over the past decade.

Why quality matters when investing in corporate bonds

Risk has returned. Markets have roared back from the recession angst that characterised the final months of 2018. During that stomach-churning episode we held our nerve as the available evidence suggested little risk of an imminent recession. Despite the v-shaped recovery in riskier assets, we still see equities outperforming government bonds. However, we think a cautious position in what we call equity-type risk is warranted, which includes most corporate bonds.

It may seem counterintuitive, given our preference for maintaining exposure to equities, but our analysis suggests it might be time to reduce exposure to the lowest quality investment grade corporate bonds (BBB rated) in favour of the safety of higher-quality debt (bonds with a credit rating of A to AAA). We classify these safer corporate bonds, or credits, as liquidity-type assets because they can more easily be sold in times of market turmoil.

The most anticipatory leading economic indicators are yet to send a recessionary signal as a group. However, the yields on corporate bonds with a BBB credit rating relative to US Treasuries reaches its trough on average eight to 12 months before a recession. That leaves less of a window between the early warning signals and the peak in credit markets (yields move inversely to prices) compared with equities.

Furthermore, the liquidity risk (the risk of not being able to sell an asset at a fair value or at all) has gone up in credit markets due to a number of structural changes following the financial crisis. We think it’s prudent to make the switch now, given this risk will only heighten when default rates pick up and there is an increase in the number of BBB bonds being downgraded to high yield, or non-investment grade (anything below BBB).

To be clear, the default rates implied by today’s valuations are still comfortably above average. But we see little scope for valuations to go higher,

and do not feel that the additional yield you get from equity-type versus liquidity-type investment grade credit is enough to compensate for the extra risk.

What’s worse, the balance sheets underlying a disconcerting number of BBB issuers are looking weak. If economic conditions do deteriorate, some of these companies with high levels of debt and lower levels of cash flow for covering that debt could be in trouble.

Ringing the changesWe are concerned about some of the fundamental changes we’ve seen in the sterling-denominated corporate bond market over the past decade. For instance, the lowest rated BBB credits have grown to roughly half of the overall investment grade market, from just a fifth (figure 3). Some analysts would point to higher standards at the credit-rating agencies since the financial crisis.

Regardless of the causes of this increasing preponderance of BBB-rated debt, if there were a similar percentage of downgrades to what was experienced in the last recession, there would be far more debt for the high yield market to digest. That would exacerbate the liquidity issues discussed above.

The lowest-rated BBB segment has

also grown substantially as a proportion of the euro and dollar investment-grade markets, which are both far bigger. In fact, both these markets have grown more substantially overall, meaning the absolute growth in their BBB segments has been even more significant.

This shift is the latest part of a wider reorientation towards favouring more defensive assets that we began last year. With the current spreads being, in our view, insufficient to justify the additional risk of equity-type over liquidity-type investment grade credit, we think the shift makes sense. In particular, we are wary of the growing liquidity risk we see in BBB corporate bonds, given the structural changes that have boosted this risk since the last recession.

Making the grade

If economic conditions do deteriorate, some companies with high levels of debt and lower levels of cash flow for covering that debt could find themselves in trouble.

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Stay invested

It’s important to be patient as the business cycle matures

Owing to its size and influence around the world, what happens in the US economy has important implications for financial markets everywhere. The 2008 financial crisis is a fading memory, and America is now enjoying one of the longest periods of economic growth in its history. Although the pace of this expansion appears to be slowing, there are few signs that the world’s largest economy is about to fall into recession any time soon.

The surge in economic growth in the middle of 2018, thanks in part to tax cuts, was offset by decelerating consumer spending towards the end of the year. Still, despite the ongoing trade dispute with China and a government shutdown at the start of 2019, conditions remain reasonably healthy.

Amid signs that the economy may be coming off the boil, the Federal Reserve (Fed) has recently ditched its guidance to investors suggesting that further interest rate hikes lie ahead. The central bank vowed to be “patient”, citing low inflation and recent economic turbulence as reasons not to raise rates. So far, this shift seems to have supported equities by assuaging any fears that the Fed would raise interest rates too aggressively and choke off growth.

Time to adjust portfoliosWhile we remain in favour of staying invested in equities, as the economic cycle matures, we believe it’s prudent to start adjusting portfolios in favour of higher-quality equities and those with more defensive characteristics — those that are less dependent on economic conditions for their performance. Within corporate bond markets, we prefer those with higher credit ratings (see article ‘Why quality matters when investing in corporate bonds’ on page 5).

We believe it’s premature to position for a recession. Even the most forward-looking leading economic indicators are yet to send a recessionary signal. They include, for example, the real (adjusted

for inflation) growth rate of money supply, and the difference between one- and 10-year yields on US government bonds, or Treasuries.

This relationship, known in the parlance as the yield curve, inverted in late March (one-year surpassed 10-year yields). An inverted curve has been a harbinger of all of the last nine recessions, while sending just two false signals. However, investors must be careful. The length of time between inversion and recession is very inconsistent, and is always long.

In previous economic cycles, these leading indicators have sent signals many months before equity markets peaked. Therefore, any decision to shift portfolios too early could result in missing out on further stock market

gains for a considerable period of time. At the same time, defensive sectors tend to outperform cyclicals after the warning lights start flashing and before equity markets peak.

However, as we explored in the previous issue of InvestmentInsights, some of today’s defensives may not be fit for tomorrow. For example, consumer staples face change as lowered barriers to entry give rise to challenger brands that use social media to target audiences cheaply and effectively.

Meanwhile, healthcare and pharmaceuticals usually enjoy relatively stable demand throughout the economic cycle but are currently facing increased scrutiny over pricing in the US, where rising healthcare costs are a hot political issue. Given the challenges traditional

Source: Datastream and Rathbones.

Figure 4: China’s economic growth rate (%)We use data that is timelier and less susceptible to manipulation by official statisticians to ‘nowcast’ the real underlying rate of economic activity in China.

O�cial �gure Range of nowcast estimates

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Any decision to shift portfolios too early could result in missing out on further stock market gains for a considerable period of time.


Stay invested

defensives face, investors must cast their nets more widely to find safe havens.

Global growth is slowingWe acknowledge that the pace of global economic growth is slowing and is likely to continue to do so. In China, industrial output has slowed and new home sales have fallen. Officials are easing policy by cutting taxes and increasing local government infrastructure investment. Yet the most reliable indicators of the true underlying rate of activity growth in China have not plunged (figure 4).

The US slowdown is largely cyclical, driven by higher interest rates, the fading impact of President Trump’s tax cuts and uncertainty over ongoing trade tensions with China. The budget can’t handle another fiscal splurge, while any monetary stimulus, should the Fed decide to lower rates, would take a long time to feed through into real activity.

There is plenty of weak data around, such as sales of cars and residential properties. Meanwhile, banks have been tightening their lending standards slightly, which could weigh on capital expenditure towards the end of the year. Yet on balance, these indicators suggest the probability of a recession in 2019 is very low. Personal income growth remains strong, there’s plenty of scope for the savings rate to decrease, and so the overall outlook for consumption looks fine (figure 5).

Continental shiftEconomic growth across the eurozone was robust in 2017 and early 2018 but has weakened recently. Italy fell into recession in the second half of 2018, and Germany suffered a quarter of negative growth. The European Central Bank (ECB) has reacted with a promise to keep interest rates at historically low levels for at least the rest of the year.

Conditions in the eurozone have been particularly poor, but leading economic indicators are consistent with weak growth rather than a

recession. They include the European Commission’s economic sentiment index, the IFO business survey, the composite Purchasing Managers’ Index and the Belgian business confidence index (which tends to be a reliable gauge of internal eurozone demand).

Slowing industrial production weighed heavily on economic activity in the last three months of 2018, although January numbers were much improved in France, Spain and Italy. Employment growth is reasonably robust, wages are rising and household lending is increasing, which together should support consumer spending in 2019.

Although we think the current business cycle has further to run before falling into recession, we’re aware of the risks and remain cautious. The global economic slowdown is likely to leave growth at a level where equities can continue to outperform bonds or cash. Yet we should not ignore the slowdown, which can play a key role in how we position portfolios and adjust to the changing environment.

Figure 5: The US consumer is holding upThe overall outlook for personal consumption in the US looks fine, which is another reason why we believe the probability of a recession in 2019 is very low.


Conditions in the eurozone have been particularly poor, but leading economic indicators are consistent with weak growth rather than a recession.

University of MIchigan Consumer Sentiment Index Real personal consumption (annual change, %) right

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Retail therapy

Source: ONS.

Figure 6: Moving onlineThe outlook remains uncertain for many high-street stores as people increasingly prefer to shop from the comfort of their own homes.

Property owners are adapting to the popularity of online shopping

We’ve always been a nation of shopkeepers and spendthrifts. But how we get our retail fix today is dramatically different to even five years ago, let alone the turn of the millennium.

The proportion of UK shopping done online soared from about 3% in 2007 to almost 20% in 2018. It’s not only how we’re shopping that is changing. Increasingly, we’re spending our cash on adventures and eating out (or in). Experiences — rather than clothes and other material things — are flavour of the decade. This trend is summed up by the owner of Johnnie Walker pouring £185 million into Scotch whisky experiences in Scotland, including a seven-storey whisky visitor centre in the heart of Edinburgh.

Recent earnings results reflect these shifts. Food retailers, including the large supermarkets, posted resilient performances over the important Christmas trading period. Yet non-food retailers struggled, including online upstarts Boohoo.com and ASOS, raising questions about whether even online-only retailers can sustain their high growth over the long term.

UK retailers, both online and on the high street, are struggling against a confluence of more expensive imports, higher minimum wages and razor-sharp competition. UK retail sales (excluding fuel) are growing reasonably, but this hasn’t been enough to offset the oldest squeeze in the game: paying more for your goods and workers and selling your products for a lower price than you’d like. That’s why more stores closed for good in 2018 than at any time since 2012. The collapse or restructuring of a well-known retailer has never been far from the headlines over the past two years.

Retailers’ pain, landlords’ strainThe health of UK retailers has important implications for other sectors, in particular real estate. Many shops aren’t owned by the retailers who occupy them. The relationship between a commercial tenant and its landlord is a complicated one —

more of a partnership in many cases.As many retailers have defaulted

or asked creditors to renegotiate leases and debts, high street landlords have suffered from reduced rents, lower demand because of store closures and an increase in vacant properties. As a result, real estate investment companies (REITs) with a lot of retail shops now have share prices that are lower than the per share putative value of their property portfolios. In effect, you could buy these properties for less than they are worth on paper. While this may look attractive at first glance, there’s a risk that those paper values are higher than a buyer would actually pay for the properties. Further drops in shop values could occur.

The growth of online retailing and its thirst for warehouses and distribution centres have been a boon for the industrial property market. Rental growth, a good indicator of demand for property assets, is close to all-time highs for these large industrial sheds. It’s no surprise that the logistics-focused real estate stocks have been among the best performers in the sector. Yet the supply of industrial sheds has now overtaken the take-up rate for the first time in about seven years. This booming market, fully in flux, may be peaking. High values and a flood of supply mean risks are rising quickly here.

Out with the old, in with the new. In a manifestation of experience-led retail taking over from traditional shopping, Diageo has recently announced plans to open a flagship Johnnie Walker visitor centre at the iconic 146 Princes Street in Edinburgh. The building had been part of the House of Fraser chain since 1953 but falling sales and soaring rents forced the store to close its doors for the last time. Diageo is planning to restore the building and create a visitor centre with flexible events space and rooftop bars to form the focal point of its £185 million investment in Scotch whisky experiences in Scotland.

Tomorrow’s high street

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Investing can have a positive impact on society and the environment

In the wake of the 2008 financial crisis, the message from regulators to the investment industry was clear — society needs you to be active and responsible investors. For many asset managers, this meant thinking about signing the Stewardship Code, and upping their game on proxy voting and engagement with underlying companies.

For Rathbones, already responding to these trends, it created further incentives to refine and develop our own approach to proxy voting, governance and long-term stewardship. But the Stewardship Code is now under review, with the Financial Reporting Council (FRC) setting out a proposed updated code in January. What’s next on the responsible investment and stewardship agenda?

Often a good basis for looking forward is to look back. This is true also for Rathbones, as 2019 will mark our tenth anniversary as signatories to the UN-backed Principles for Responsible Investment (PRI). We were one of the first UK wealth managers to sign up to these principles, but since that time the pace of growth has been rapid. When we joined, there were fewer than 500 others like us — now we are joined by more than 2,000 of our peers in the investment world. Responsible investment — defined here as trying to integrate environmental, social and governance (ESG) factors into the investment process — is now firmly in the mainstream.

Our own work under the PRI framework has evolved over the past decade. We now employ two full-time people on stewardship issues, and have expanded the coverage of our voting and engagement activities in listed equity holdings. Our stewardship committee sees investment professionals wrestle with the governance issues at our biggest companies, and we now use a detailed bespoke voting policy to guide our decisions. Under the PRI we have engaged with companies on a range of wider ESG issues, from slavery to deforestation. We have seen

both companies and policy makers implement investors’ recommendations for more responsible outcomes. While this is encouraging, we recognise that more needs to be done. In particular, we are excited by the opportunities that can arise from integrating ESG into the investment process itself.

The year aheadIn the coming year we plan to explore this issue in a deeper way than ever before. Core to this project is a belief that, at its heart, capitalism can be pursued responsibly, and that in doing so, society at large benefits. We believe that capital markets can trigger the kind of investments in useful infrastructure at a scale that can bring benefits to all. We also think that some of the challenges facing society, as summed up neatly by the UN’s Sustainable Development Goals, create a huge investment opportunity.

We are looking to explore the way in which the corporation can be released as a force for good — that is, aligned with the purpose of society, to create shared value beyond the walls of the firm. Encouraged by the proposed new Stewardship Code, we will be exploring the way in which we can bring the most tangible ESG risks and opportunities further within the scope of our investment and stewardship

activities. In essence, this concerns spelling out not just how we steward clients’ assets, but the purpose we have in doing so.

These thoughts are echoed by changes to the UK corporate governance code, which emphasise company purpose and values, reminding UK plc that the rights and privileges granted to corporations are done so based on a social contract. That is, companies are allowed to exist in the scale they currently do as only they can raise and deploy capital at the scale needed for the long-term good of society. Investors have a key role to play in restating to companies that the purpose and process behind financial success matters as much as the profits gained.

A sustainable approach

Source: UN PRI.

Figure 7: Investors are becoming more responsibleMore than 2,000 asset managers around the world are now signatories to the UN-backed Principles for Responsible Investment (PRI).

Often a good basis for looking forward is to look back. This is true also for Rathbones, as 2019 will mark our tenth anniversary as signatories to the UN-backed Principles for Responsible Investment (PRI).

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Financial markets

The US stock market suffered its worst year in a decade as the S&P 500 fell more than 6% in 2018. A sizeable chunk of the losses came towards the end of the year, when the index recorded its worst December performance since 1931. However, markets rebounded strongly over the first three months of this year as investors realised that the sell-off was overdone and valuations became more attractive. Notably, the S&P 500 Index enjoyed its best January since 1987.

The major catalyst for the rally was the change in the Fed’s monetary policy outlook. Signs of a trade deal between the US and China also helped. The Shanghai stock market rose in response to the suspension of tariffs. Investor sentiment was also lifted by comments from President Xi Jinping about quickening the pace of development in China’s financial services industry.

An inverted curveBond markets continued to suggest investors are nervous about slowing global growth. The high-yield spread has been rising. Meanwhile, US Treasury yields dropped as investors rushed to the safety of government paper. Notably, parts of the yield curve (the difference between yields for short- and long-dated government debt) inverted again, which can signal investors are anticipating a recession, although it can’t tell us the timing and can be a false signal.

UK gilts rallied towards the end of the quarter, reflecting the intense nerves over Brexit as negotiations reach a critical stage. Benchmark 10-year gilt yields fell towards 1% after hovering around 1.2% for the rest of the quarter. The yields added to pressure on the pound, which faced volatility in the run-up to Britain’s exit from the EU.

Oil prices rose to a four-month high with Europe’s Brent Crude benchmark hovering just below $70 a barrel at the end of the quarter. Supply restrictions appear to be the main cause, owing to sanctions and production cuts.


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Past performance is not a reliable indicator of future performance.

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Important information

This document and the information within it does not constitute investment research or a research recommendation. Forecasts of future performance are not a reliable indicator of future performance.

The above information represents the current and historic views of Rathbones’ strategic asset allocation committee in terms of weighting of asset classes, and should not be classed as research, a prediction or projection of market conditions or returns, or of guidance to investors on structuring their investments.

The opinions expressed and models provided within this document and the statements made are, due to the dynamic nature of the items discussed, valid only at the point of being published and are subject to change without notice, and their accuracy and completeness cannot be guaranteed.

Figures shown above may be subject to rounding for illustrative purposes, and such rounding could have a material effect on asset weightings in the event that the proportions above were replicated by a potential investor.

Nothing in this document should be construed as a recommendation to purchase any product or service from any provider, shares or funds in any particular asset class or weighting, and you should always take appropriate independent advice from a professional, who has made an evaluation, at the point of investing.

The value of investments and the income generated by them can go down as well as up, as can the relative value and yields of different asset classes. Emerging or less mature markets or regimes may be volatile and subject to significant political and economic change. Hedge funds and other investment classes may not be subject to regulation or the protections afforded by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) regulatory regimes.

The asset allocation strategies included are

provided as an indication of the benefits of strategic asset allocation and diversification in constructing a portfolio of investments, without provision of any views in terms of stock selection or fund selection.

Changes to the basis of taxation or currency exchange rates, and the effects they may have on investments are not taken into account. The process of strategic asset allocation should underpin a subsequent stock selection process. Rathbones produces these strategies as guidance to its investment managers in the construction of client portfolios, which the investment managers combine with the specific circumstances, needs and objectives of their client, and will vary the asset allocation accordingly to provide a bespoke asset allocation for that client.

The asset allocation strategies included should not be regarded as a benchmark or measure of performance for any client portfolio. Rathbones will not, by virtue of distribution of this document, be responsible to any person for providing the protections afforded to clients for advising on any investment, strategy or scheme of investments. Neither Rathbones nor any associated company, director, representative or employee accepts any liability whatsoever for errors of fact, errors or differences of opinion or for forecasts or estimates or for any direct or consequential loss arising from the use of or reliance on information contained in this document, provided that nothing in this document shall exclude or restrict any duty or liability which Rathbones may have to its clients under the rules of the FCA or the PRA.

We are covered by the Financial Services Compensation Scheme (FSCS). The FSCS can pay compensation to investors if a bank is unable to meet its financial obligations. For further information (including the amounts covered and the eligibility to claim) please refer to the FSCS website fscs.org.uk or call 020 7741 4100 or 0800 678 1100.

Rathbone Investment Management International is the Registered Business Name of Rathbone Investment Management International Limited which is regulated by the Jersey Financial Services Commission. Registered office: 26 Esplanade, St. Helier, Jersey JE1 2RB. Company Registration No. 50503. Rathbone Investment Management International Limited is not authorised or regulated by the PRA or the FCA in the UK.

Rathbone Investment Management International Limited is not subject to the provisions of the UK Financial Services and Markets Act 2000 and the Financial Services Act 2012; and, investors entering into investment agreements with Rathbone Investment Management International Limited will not have the protections afforded by those Acts or the rules and regulations made under them, including the UK FSCS. This document is not intended as an offer or solicitation for the purchase or sale of any financial instrument by Rathbone Investment Management International Limited.

Not for distribution in the United States. Copyright ©2019 Rathbone Brothers Plc. All rights reserved. No part of this document may be reproduced in whole or in part without express prior permission. Rathbones and Rathbone Greenbank Investments are trading names of Rathbone Investment Management Limited, which is authorised by the PRA and regulated by the FCA and the PRA. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No. 01448919. Rathbone Investment Management Limited is a wholly owned subsidiary of Rathbone Brothers Plc.

Our logo and logo symbol are registered trademarks of Rathbone Brothers Plc.

If you no longer wish to receive this publication, please call 020 7399 0000 or speak to your regular Rathbones contact.

Investments can go down as well as up and you could get back less than you invested. Past performance is not a guide to the future.

Taking the next stepIf you want to invest with us, we’d like to speak to you

Call: 020 7399 0000

Visit: rathbones.com

Email: [email protected]

For ethical investment services:Rathbone Greenbank Investments0117 930 3000rathbonegreenbank.com

For offshore investment management services:Rathbone Investment Management International01534 740 500rathboneimi.com

@Rathbones1742

Rathbone Brothers PLC

Rathbone Brothers PLC

Rathbones has a long tradition of keeping an eye on the future. We’ve been speaking to some of the great thinkers, journalists and writers of our time in a range of video and audio podcasts, articles and broadcasts on Jazz FM. To find out more about the themes affecting the near future of our changing world watch, listen to or read the Rathbones Look Forward series online at rathboneslookforward.com

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